Open Banking is revolutionary, but will it take off?

As of January 2021, personal and guarantor lenders in the UK can now use open banking as a better way to underwrite and analyse their customers who apply.

With open banking technology, borrowers agree to giving access to their bank statements and transactions during the application process, with the hope that opting in will maximise their chances of approval.

“Open banking is a safe way for you to allow trusted lenders and providers access to your personal financial data,” says David Beard of Lending Expert “Information like your income and spending habits can now be shared with lenders which allows them to make more informed and smarter lending decisions when it comes to applying for credit and loans.”

“Back in the ‘old days’ if you wanted a mortgage or a loan then the lender may have asked you to provide copies of bank statements,” Beard says. “And an underwriter may have had to read through these to assess and verify your bank accounts and spending habits. However, this can now all be done digitally and much faster with Open Banking.”

Where is Open Banking available?

The UK’s nine largest banks and building societies are already making client data available through Open Banking, including Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, RBS Group and Santander. Smaller banks and building societies are also following suit.

Is Open Banking a good thing?

There are a lot of benefits to Open Banking and it has gained a lot of support from the Financial Conduct Authority (FCA).

The ability to view a potential customer’s banking transactions can make for far better underwriting, by allowing the lender to understand their spending patterns, outstanding debts and potential risks.

“Open Banking is revolutionary when it comes to underwriting,” says Dan Kettle of Pheabs, an instalment loan connection service provider. “Previously, we would run a number of automated rules and decisions to determine which customer was best to lend to and although we would make strong decisions, these could never be fully verified.”

“But with Open Banking, we can see the exact bank transactions that customers have had over the last few weeks and months. If there is a history of repeat gambling or taking out other high cost loans, these raise warning flags on our system and we know that we should be more cautious with this kind of client.

“Previously, we would have had to have made assumptions about this kind of thing and if we were wrong, the customer would fall into arrears.”

Does Open Banking have its limitations?

“Open Banking may not always be available,” says Richard Dent of Finger Finance. “The applicant still has to opt in every time to share their data and a lot of esteemed customers are not going to want to do this. It also raises concerns over safety and privacy of very personal data. If someone hacks into a lender’s system, they are getting far more than ever before.”

“But overall, we feel that Open Banking is a good thing since it allows us to understand and manage risk more effectively, tailoring products for customers based on their income and expenditure, so overall the customer wins too.”

Meanwhile, Nadeem Siam of Fund Ourselves says that Open Banking makes tailoring products and services to individuals easier due to the infinity of APIs making everything simpler.

“All you need is access to technology,” he says. “Time spent is reduced and operations are automated.”

“However, there has been a lack of credibility on the part of customers towards Open Banking due to the fear of sharing personal data, and not fully understanding how it works. The Fintech option is more appealing where services are diverse and where more and more are emerging worldwide. They are simple, fast and more cost effective.”